Consortia - The second china consortium

By June 1918 the Wilson administration was forced to concede failure in
its efforts to find American capital for investment in China. Fearing that
the Japanese, in the absence of American or European competition, would
monopolize Chinese economic affairs, Wilson agreed to allow the American
group to join its old associates in a new consortium. The American group
was to become more inclusive, admitting to membership banking groups
throughout the country, and it would pledge not to undermine Chinese
sovereignty. In return, Wilson agreed to announce that the group was
offering a loan to China at the suggestion of the government.

The Wilson administration had returned to the conception of an
international banking consortium, because no other means could be found to
move American capital into China. The American initiative for a new
consortium was intended to serve the same purpose independent American
loans would have served: the containment of Japanese economic expansion to
preserve opportunity for U.S. expansion in China. Given Wilson's
faith in the "liberal exceptionalism" of the United States,
he readily assumed that U.S. expansion, unlike the Japanese variety, would
be salutary for China—that Chinese and American interests were
congruent.

For the American group, Thomas W. Lamont of J. P. Morgan and Company met
with representatives of the British, French, and Japanese banking groups
in May 1919, at the Paris Peace Conference. Lamont proposed and reached
rapid agreement on the American plan for pooling all future business in
China and for pooling all existing loan agreements and options involving
public subscription except those relating to industrial undertakings upon
which substantial progress had been made. The efficiency of cooperation
and the expectation of the exclusive support of their governments were
attractive to the bankers.

In June, however, the Japanese group reported that its government insisted
on excluding from the consortium agreement all rights and options held by
Japan in Manchuria and Mongolia, where Japan had "special
interests." The Japanese expected the United States to consent to
the exceptions on the basis of Secretary of State Robert Lansing's
recognition of Japan's "special interests" in his
1917 agreement with Viscount Ishii Kikujiro. Once Japan's sphere in
Manchuria and Inner Mongolia was thus protected, the Japanese government
viewed the consortium with favor, as a means of improving relations with
the United States and as an instrument for checking the anticipated
torrent of American capital.

The purpose of the consortium, as understood in Washington and London,
however, was to eliminate special claims to spheres of influence and to
open all of China to cooperative international development. Not only the
Wilsonians, but also Lord Curzon, Great Britain's secretary of
state for foreign affairs, considered economic imperialism an anachronism
in the face of the nationalist movement that was sweeping over China. When
the French government expressed fear that refusal to grant the
reservations Japan requested would result in the Japanese finding friends
outside the circle of their wartime allies, Curzon insisted that the
Japanese request was inadmissible and expressed confidence that they would
back down in face of the unanimity of the British, French, and American
groups supported by their governments.

Months passed as the Japanese and U.S. governments exchanged mutually
unsatisfactory counterproposals. In February 1920 Lamont went to Tokyo in
an attempt to break the deadlock. One area for possible compromise
existed, and the State Department had focused on it in December 1919:
Japan's existing economic interests ("vested"
interests in Manchuria and Mongolia) could be conceded, excluded from the
scope of the consortium. Both sides moved slowly toward this position. To
prod the Japanese government, Wilson authorized a threat to reveal the
secret protocol of the Lansing-Ishii Agreement, in which Ishii had
committed Japan not to seek privileges in China at the expense of other
powers.

As the negotiations proceeded, Lamont proposed an exchange of notes
between the American and Japanese groups defining the attitudes of foreign
bankers toward Japanese economic interests in Manchuria and Mongolia,
specifying what would or would not come within the scope of the
consortium. Lamont's plan would allow for the acceptance of
existing economic facts without giving official governmental recognition.
Only the consortium would recognize Japan's economic interests. The
American and British ambassadors to Japan liked Lamont's proposal,
but the Department of State rejected it and suggested that Lamont reach an
agreement on the basis of specific enterprises the Japanese wanted to
exclude from the consortium's focus. The U.S. government would not
accept a reference to the exclusion of any region of China. Lamont was
angered by State Department scruples, but, insisting that Manchuria was in
fact dominated by the Japanese and unattractive to nationals of the other
banking groups, he was able to reach agreement with his Japanese
counterpart on the department's terms. In April 1920 the Japanese
government, in a last effort to strengthen the consensus within the
leadership, bid once more for veto power over railway construction in
Manchuria. If further concessions could be won from Japan's
prospective partners, opposition to the agreement within Japan might be
stilled. The effort alone might satisfy dissidents within the cabinet that
the government had done all that was possible. But the U.S. and British
governments held firm and the Japanese appeared to retreat.

In the following month, the Ministry of Foreign Affairs gave the U.S.
ambassador, Roland Morris, a "draft reply" to the American
rejection of Japan's last set of reservations, claiming that the
earlier note had not been presented for the purpose of raising new
conditions but simply to avoid future misunderstandings. The Japanese
government would not insist on explicit American assurances but would
accept the general assurances offered previously and refrain from
insisting upon discussion of the veto power it sought initially. The
Japanese were satisfied to make known to the U.S. government their
interpretation of the questions at issue.

Lamont and the American ambassador were pleased, interpreting the Japanese
position as complete acceptance of the position taken by the U.S.
government and supported by the British and French governments. But J. V.
A. MacMurray, chief of the State Department's Division of Far
Eastern Affairs, argued that the Japanese had retracted nothing. MacMurray
claimed that the Japanese note reemphasized Japan's claim to a veto
on railway construction in Manchuria and had further placed on record
their understanding that American assurances regarding Japan's
right of self-preservation meant U.S. recognition of that veto power. But
MacMurray was overruled; the Department of State accepted the Japanese
draft, and the consortium negotiations were concluded.

MacMurray was probably correct when he contended that the Japanese, in
addition to receiving explicit acceptance of all of their existing and
some of their projected economic interests in Manchuria and Mongolia, had
established a strong basis for arguing that the United States had conceded
to Japan veto power over railway construction in Manchuria. Certainly that
was the view that prevailed in official Japanese circles. But
MacMurray's superiors in the Department of State had concluded that
the choice was between accepting the conditions obtained or surrendering
the idea of the four-power consortium. To the U.S. government there
appeared no alternative means of preserving American interests in China.
After March 1920, when the Senate for the third time rejected U.S.
membership in the League of Nations, the consortium offered the best,
perhaps the only, basis for cooperation with the powers in China.

With the formation of the consortium in 1920 and the subsequent agreements
reached at the Washington Conference (1921–1922), Great Britain,
France, Japan, and the United States were committed to cooperation among
themselves in assisting with the modernization of China. The consortium
bankers were to provide the Chinese government with the funds it needed to
build railroads and other major productive enterprises. But in the six
years that followed the Washington Conference, China suffered from almost
constant civil strife, and, despite prompting from the U.S. and British
governments, the consortium did nothing to assist China's economic
development: no loans were granted. The British frequently referred to the
consortium as a financial "blockade," designed to prevent
the Chinese government from obtaining funds it would presumably misuse.

Similarly, American businessmen anxious to develop or expand their
interests in China failed to obtain needed capital. They did not lack
support from the U.S. government, within which the Departments of Commerce
and State competed to build up American economic interests in China. But
American entrepreneurs in China, like the Chinese government, found the
consortium an obstacle.

The core of the problem was the divergence between the interests of the
Department of State and those of Lamont and his fellow bankers. The
department wanted the consortium to provide capital for China's
development—to help in the creation of a strong modern China in
which American interests would thrive. For the bankers, the remote promise
of China could not compete with the more immediate promise of Japan. In
1923 the House of Morgan floated a $150 million loan for the Japanese
government, and other smaller loans followed in the mid-1920s. American
capital that might have been available to China was lent instead to the
Japanese, and some of it, by indirect means—by being
"laundered" or simply by freeing other
capital—facilitated the expansion of Japanese interests on the
Asian mainland. Because the Japanese were competing with the Chinese for
American capital, they could use their position in the consortium to
discourage loans to China. The American group, led by Lamont, accepted
this process. In short, one of the two competitors for capital worked in
collusion with the potential lender to deny capital to the other. However
permissible among businessmen pursuing profit, it was not consistent with
the ends of public policy. Conditions in China, however, left the
Department of State no means for changing the direction of the flow of
capital. Lamont proved to be remarkably skillful in leading State
Department officials to believe that he shared their views but was held
back by partners less interested in helping China.

Twice during the early years of the consortium's existence the
ability of Lamont and his colleagues to avoid lending money to the Chinese
was tested. In both instances, in 1922 and in 1923, the U.S., British,
French, and Japanese ministers to China and the Peking representatives of
all four banking groups recommended that the loans be granted. In both
instances the diplomats and group representatives argued that the
consortium could not afford to reject Chinese overtures. But in neither
instance could Lamont be moved, supporting or being supported by the head
of the British group or the Japanese government in his opposition to
taking up the Chinese business.

For the next two years, until the violence subsequent to the May Thirtieth
Incident radically changed the context, Lamont and his British
counterpart, with at least the public support of their governments, sang
in praise of the success of the consortium's negative effort. They
had stopped wasteful borrowing by the Chinese government, and their
cooperation had a salutary effect on relations among the powers in China.
Despite dissatisfaction with the inactivity of the consortium, the U.S.
and British governments were anxious to have it remain in existence. For
the United States and Great Britain the consortium appeared to have
assisted in checking the expansion of Japan's economic hold over
China. For the British, continued Anglo-American cooperation in East Asia
was itself a valuable end. And the Japanese indicated no dissatisfaction
with the consortium, supporting a motion in 1924 to renew the agreement in
perpetuity. France, the fourth party to the consortium agreement, appeared
to its partners to be apathetic, unreliable, and forever bargaining for
some trivial advantage, but supportive of the others when the agreement
was renewed.

Although after 1923 there was never again serious consideration of a loan
from the consortium to any Chinese regime, the organization continued to
exist, at least in theory, until a decision in 1946 that the Japanese
attack on U.S. and British forces in 1941 constituted abrogation of the
agreement. The persistence of the consortium through the 1930s is
remarkable because of the constant desire of the American group to
withdraw and because of the determination of the British government to end
the agreement in 1937. One stubborn man, Stanley K. Hornbeck of the
Division of Far Eastern Affairs, Department of State, continually blocked
dissolution, with an assist from the Japanese army in the summer of 1937.

The American group's desire to be rid of the consortium, voiced
regularly by Lamont, reflected the leadership's conviction that
there was no money to be made out of China and that continuation of the
organization was not worth the bother or expense. From 1920 on, Lamont
argued that there was no market for Chinese securities in the United
States—that the American investor would not touch Chinese bonds
until the Chinese demonstrated stability and paid off earlier loans,
especially the Hukuang Railway loan, on all issues of which they had
defaulted in 1925. After the Banking Act of 1933 prohibited banks of
deposit from underwriting or offering securities, Lamont explained to the
Department of State that his own firm and most members of the American
group could no longer participate in loan operations even if they were to
become feasible on a business basis. But for over a quarter of a century,
Lamont deferred to the State Department's desire to maintain the
consortium. It was not until January 1946 that he succeeded in getting the
department to concede unequivocally that no useful purpose would be served
by continuing the consortium, with or without the American group in it.

Despite their failure to get the consortium to lend money to China,
officials of the Department of State fought to keep the organization in
existence. Certainly it was not because American economic interests
prospered. Lamont and his colleagues were concerned with their own profits
and not with the expansion of the trade of their countrymen or with
abstract conceptions of national interest. Sino-American trade remained
static in the 1920s and rose slightly only in percentage terms for a few
years in the early 1930s. The increase in American investments in China
was not impressive. The American group hindered rather than helped the
development of U.S. economic interests in China, as the Department of
Commerce found when it tried to advance the prospects of American
corporations.

Ultimately, men like MacMurray and Horn-beck fought to retain the
consortium as a means of keeping the United States involved in East Asia,
in the affairs of China. This had always been the fundamental purpose of a
policy of cooperation with those powers earlier and more profoundly
committed to activism in China. Without hitching a ride, the State
Department's East Asian specialists, from John Hay's
adviser, William W. Rockhill, through Hornbeck, feared not only that the
United States would be deprived of an opportunity to expand its interests
in their region, but also that interest in the area to which they were
committed would cease to exist in the United States. The promise of U.S.
expansion in China, however remote the reality, had become their raison
d'être. The consortium, however inadequate, was the only
vehicle they had for much of the interwar period.